OtherPapers.com - Other Term Papers and Free Essays
Search

Evolution of Monetary Policy Stance - Policy Stance in Fy 2008-09 - Bangladesh

Essay by   •  August 10, 2011  •  Essay  •  920 Words (4 Pages)  •  1,704 Views

Essay Preview: Evolution of Monetary Policy Stance - Policy Stance in Fy 2008-09 - Bangladesh

Report this essay
Page 1 of 4

2. EVOLUTION OF MONETARY POLICY STANCE: AN OVERVIEW

Policy Stance in FY2008-09

Macroeconomic management in FY2007-08 had been challenging, particularly due to aggravated

inflationary pressure which was largely underpinned by high commodity prices including that of fuel,

food and fertilizer. Taking note of the trends in global commodity markets, the Bangladesh Bank in

its MPS for the first half of the fiscal year 2008-09 (FY09) set the inflation target at 9.0 per cent

(which was already in double digit at that time) and programmed adequate credit growth in order to

support the GDP growth target of 6.5 per cent (Bangladesh Bank, 2009). Priority was accorded to

credit which would support creation and expansion of output capacities, e.g. promoting agricultural

and SME loans and discouraging expenditures on ostentatious consumption. In order to reduce

money supply, the Bangladesh Bank also announced that Cash Reserve Ratio (CRR) should not be

less than 4.5 per cent, up from 4.0 per cent, in any day of the month; although, CRR on bi-weekly

average remained unchanged at 5 per cent. The central bank also mentioned that any bank that fails

to adhere by its CRR guidelines will be penalized at bank rate plus 5 per cent on the difference of the

reserves. BB also enhanced its Repo and Reverse Repo interest rates by 25 basis points in September

and November 2008 respectively to 8.75 and 6.75 per cent to slowdown the pace of private credit

growth.

As inflationary pressure started to cool down since October 2008, the Bangladesh Bank revised the

inflation projection downward to 8.5 per cent in its second MPS of FY09. On the other hand, as the

global economic recession weakened domestic economic activities, the Repo and Reverse Repo rates

were brought down to their earlier level in March 2009. The central bank also made engagement in

agriculture lending mandatory for all commercial banks including private and foreign banks during

this time. During the last quarter of FY09, the BB introduced a 13 per cent interest cap for on lending

(through directive instead of "moral suasion"), except for credit card and consumer loans and

allowed rescheduling of loans without any down payment until September 2009 to four exportoriented

sectors which were affected by fall in external demand viz. for frozen food, jute, leather

and textiles.

Thus, one observes that the monetary policy stance of the central bank in Bangladesh underwent a

few adjustments in response to domestic and global economic developments. As a result of these

adjustments as well as due to other policy and institutional interventions, Bangladesh economy, at

an aggregate level, performed quite appreciably in FY09, with a near-six per cent GDP growth and

four and a half per cent per capita income growth. Agriculture sector (particularly crop sector)

posted significant achievement to improve food security. Most of the macroeconomic indicators,

notwithstanding their structural flaws, exhibited overall robustness. At the end of the fiscal year,

lower than estimated inflation rate was realised (7 per cent) compared to revised target of 8.5 per

cent. Balance of payment was in a comfort zone, to a large extent due to buoyant foreign remittance

flow,

...

...

Download as:   txt (6.3 Kb)   pdf (86.6 Kb)   docx (11.8 Kb)  
Continue for 3 more pages »
Only available on OtherPapers.com